Fear of public backlash and complexity hold back German CO2 price

Would a price on CO2 increase everybody's heating bills? Researchers and many politicians agree that a carbon price is necessary but the government coaltion has yet to act. Photo: Pixabay.

Politicians across party lines, environmental and industry groups and researchers alike are in favour of a price on carbon emissions in all sectors. There is debate on details such as the pros and cons of a carbon tax versus a trading scheme, but all agree that Germany ultimately needs some form of a CO2 price if it wants to succeed with its energy transition. However, politicians still shy away from introducing what tabloids have already dubbed “yet another tax hammer” for fear of angering voters, and protests against fuel prices in France have made them even less courageous. UPDATE: Adds CO2 price cover story in one of Germany's most popoular weekly magazines and joint carbon price proposal by two think-tanks and research institutes with links across the political spectrum.

The Energiewende country Germany faces yet another policy conundrum: Almost all researchers, industry and environmental lobbies and many politicians across party lines agree that Germany needs to put a price on greenhouse gas emissions for all sectors, to bring the country back on track to meet its climate targets and kick-start the next phase of the energy transition. Yet whether 2019 will bring the introduction of a CO2 price remains far from certain as doubts about the government’s ability to push through such a far-reaching reform linger.

If Germany wants to avoid failing its climate targets and paying billions to offset excess emissions, it needs new policies to make sure that all sectors – particularly the transport and buildings sectors – become more climate friendly – and fast. This conclusion, heard from government representatives and seen in official energy transition reports is part of the raison d'être for a new climate action law, due to be decided in 2019.

Germany will ultimately need a price on greenhouse gas emissions across all sectors that does not overburden citizens with lower incomes in order to complete its energy transition, the country’s environment minister, Svenja Schulze, said in front of energy managers in Berlin in November. Schulze has been pushing for the idea since she took office in March but failed to secure support from other ministers who frequently pointed out that such a scheme wasn’t part of the 2018 coalition treaty.

However, she received further backing by a cover story in one of Germany's most popular weekly magazines. Der Spiegel carried a CO2 price proposal by two think-tanks and research institutes with links across the political spectrum, which aims at making "self-interest a driver for climate action". The authors from MCC/PIK and RWI argue that a carbon price is “the most cost-efficient instrument” to bring down Germany’s emissions.

Looming penalties for excess emissions from transport and heating

Germany, which is pursuing a double exit strategy from nuclear power and fossil fuels, to reach an 80-95 percent greenhouse gas reduction by 2050, is a member of the European Emissions Trading System (EU ETS). A price for CO2 therefore applies in the electricity market, for industrial companies and airlines.

Oil products for driving and heating are not charged depending on their CO2 emissions. These two sectors have done the least to reduce emissions so far. In fact, emissions from the transport sector have increased since 1990.

Germany is therefore facing costs of 30 to 60 billion euros between 2021 and 2030 for not achieving its emission reduction targets under EU effort sharing rules in these sectors. And it is set to fall short of its 2020 greenhouse gas reduction goal by eight percentage points (32 percent instead of 40 percent reduction).

The German government appears to be caught between a rock and a hard place: On the one hand, there is the climate target failure and looming costs, plus a general consensus that a CO2 price would be a good solution to these issues. On the other hand, there is the legislative complexity that a change in taxes and levies or the introduction of a new CO2 trading scheme would entail. And, more importantly, the fear of how voters would react to a rise in fossil fuel prices. "The reaction to increased petrol and heating oil prices in France has taken away a bit of our courage,” Germany’s energy minister Peter Altmaier (CDU) said in November.

But even before the bloody protests in France, the German government didn’t include a CO2 price option in its 2018 coalition treaty, although a significant change to the way the energy transition was financed ranked high on many industry and climate lobby groups’ wish lists for the new government.

Price or tax? Many options on the table

Views vary about which type of CO2 price, e.g. a tax, a trading scheme, or a carbon floor price would be best for Germany.

„As usual there is no unanimous opinion among researchers but I would say that those of us who have a strong focus on the economic context see a price on CO2, be it via a trading scheme or be it via a tax, as an efficient and preferable instrument,” professor Kai Hufendiek Managing Director of IER - Institute of Energy Economics and Rational Energy Use, University of Stuttgart, told Clean Energy Wire.

There are many advantages to reducing emissions through a price on CO2, Hufendiek says. While set exit dates for certain fossil technologies are very rigid and hard to adjust, the CO2 price promises a more efficient and flexible approach that can ensure emission reductions to take place where they are cheapest and have an effect from the very first day of their introduction.

“We want that CO2 emissions finally get an honest price tag. And personally, I think that one can’t implement climate action against the laws of the market.”

Ingrid Nestle, Green Member of Parliament

Germany’s Green Party, member in a majority of state government coalitions and sometimes openly against market driven climate schemes, fully backs the CO2 pricing idea. “We want that CO2 emissions finally get an honest price tag. And personally, I think that one can’t implement climate action against the laws of the market,” Ingrid Nestle, Green Member of Parliament (opposition) told Clean Energy Wire.

Germany’s free-market advocates from the liberal FDP (opposition) party are also in favour of a price on carbon – but only if it becomes part of the already existing EU ETS. “Refineries should have to buy emission allowances so that fossil fuels across all sectors have a common CO2 price,” Lukas Köhler member of the parliamentary committee on climate and environment for the FDP told Clean Energy Wire. Köhler says that only a quantity-based system which (like the European ETS) sets a fixed emission ceiling, would ensure that targets are definitely kept and without favouring certain technologies.

The same approach is backed by Germany’s largest industry association BDI, which at the same time doesn’t rule out “taxes or direct greenhouse gas pricing as well as quantity based systems” to ensure predictable and clear price signals that motivate consumers to switch to low-carbon technologies.

Another idea is adjusting existing taxes and levies on energy products such as heating oil, petrol, diesel and natural gas according to their CO2 intensity. This would make fossil fuels like heating oil – which is cheap in Germany – more expensive while prices for electricity would fall, a recent report by think tank Agora Energiewende* suggests.

French protests against higher taxes on petrol, diesel and heating oil have made politicians in Germany less courageous when thinking of introducing a CO2 price. Photo: By Obier - Own work, CC BY-SA 4.0.French protests against higher taxes on petrol, diesel and heating oil have made politicians in Germany less courageous when thinking of introducing a CO2 price. Photo: By Obier - Own work, CC BY-SA 4.0.

Both a tax and a trading system for CO2 would have a very similar impact, Kai Hufendiek says. It’s only deep in economic theory that the differences become evident. “Quantity control is more efficient at first sight, but since we have to take decisions about the future, we won’t get all parameters exactly right, no matter whether we determine the price or the quantity of emission allowances. Our models show that there would probably be a smaller deviation in the price estimate than in the quantity estimate,” he explains.

CO2-pricing going global – or more realistically, European

If Germany were to introduce a price on carbon, it would not be alone in Europe. And although all industrial and political actors and researchers agree with a national CO2 price, they also all stress that getting more countries to join would make the instrument more efficient and cheaper and less difficult to cope with for the German industry.

Some European countries such as Switzerland, Sweden, the UK and France already have some version of a national CO2-price in either the power sector or in other sectors as well. France and the Netherlands in particular but also Scandinavian countries are interested in joining forces with Germany to shape a common CO2 floor price in the ETS.

In the beginning of the year, the German Bundestag and the French Assemblée Nationale decided on a joint initiative for a CO2 price. “But instead of setting the course for innovation and the future, the federal government is sticking to traditional structures under the pretext of competitiveness,” the Green’s Ingrid Nestle says. “We would like to work together with France on CO2 pricing,” the FDP’s Köhler says.

How to sell citizens higher energy prices

But at the moment, the example of neighbouring France also leads to doubts. “The protests in France against higher petrol prices are ringing alarm bells against a tax,” the FDP’s Köhler says. People were already carrying a heavy burden with the current tax, it would be a fatal signal to introduce another one, which would then reduce the acceptance of climate action, he adds.

Another common theme among the CO2 price supporters is their vow to make it as cost-neutral as possible for citizens. Depending on how thorough the system would be reformed and how high the price on CO2 would rise, the tax could generate money to finance renewable levies, provide funds to help citizens refurbish their heating systems and offer a nationwide charging infrastructure for electric vehicles and lower the electricity price, think tank Agora Energiewendesuggests in its paper. Or, like in Switzerland, citizens could be paid an annual reimbursement (“Energiewende bonus”). Existing exemptions for industrial energy consumers could be kept in place.

Commenting on the CO2 price debate, Germany’s association for the mineral oil economy (Mineralölwirtschaftsverband – MWV) said that a “revenue-neutral development of the existing tax system could make sense”.

Green MP Ingrid Nestle points out that in a reformed tax and levies system where overall costs will effectively remain the same, those who act more climate friendly will be rewarded because their costs will be lower. “That is also a question of fairness because in the end they are benefiting the whole society,” she says. Not charging more for CO2 intensive heating and transport systems is also not for free, she says, adding that the Federal Environment Agency (UBA) has just calculated the overall external costs of one tonne of CO2 at 180 euros.

Every citizen would face “dramatically higher costs” when a CO2 price is introduced while reimbursements will never be entirely fair and accurate, Hufendiek says. “So, these instruments are obviously quite hard to explain to voters,” he says.

Politicians lacked the courage to explain to the voters that a price on CO₂ is necessary for effective climate protection, but needed to explain the why and how, Ottmar Edenhofer, Director and Chief Economist of the Potsdam Institute for Climate Impact Research (PIK) and vocal proponent on a CO2 price said in October.

Grand coalition fears public opinion and elections

Hufendiek’s remark sums up the outlook of a CO2 price in Germany in November 2018: Despite the wide cross-party, industry and NGO support for the instrument, the federal government is going to move very slowly at best.

For a while it looked as though a driving force for a CO2 price could be federal environment minister Svenja Schulze from the Social Democrats (SPD). In a speech in November she said her plan was to “team up with the finance ministry to create a concept for a price on CO2 emissions” – only for the finance ministry (also run by an SPD minister) to reply a few days later, that no such plans were under consideration.

Apart from the fear of the public reaction – and more state elections in 2019 where party officials fear a surge of the right-wing populist AfD in Eastern Germany – the SPD ministers are also hindered by their conservative coalition partner. The vice head of Angela Merkel’s CDU-CSU parliamentary group in the Bundestag Georg Nüßlein (CSU) said there wouldn’t be a CO2 price with his party and that climate targets had to be achieved through “innovation and technology competition and not by making driving and living more expensive”.

The CDU minister in charge of energy policy, Peter Altmaier repeatedly said that a CO2 price was neither part of the coalition agreement of 2018 nor had he yet been approached with the idea. His state secretary Thomas Bareiß, also CDU, is however entertaining the idea: "I am a fan of markets. It's a good instrument. But we then have to ask if we want to have additional instruments. If we were to introduce a CO2 price we'd have to reduce other instruments,” he said at an event in November.

Opposition politicians Köhler and Nestle both think the chances that the current government will start a new CO2- pricing system within this legislative period are very small.

Meanwhile, environment minister Schulze doesn’t want to give up quite yet: “The debate is not over, it has just started,” she said in November, receiving spontaneous applause from the energy managers at the German Energy Agency dena’s annual conference.